How financial interest charges differ from interest charges on technical debt

Last updated on June 16th, 2021 at 12:43 pm

Second only to the term debt, the term interest is perhaps the most common financial term in the technical debt literature. In the financial realm, interest charges are the cost of using money. Usually, we express interest charges as a percentage rate per unit time. By contrast, metaphorical interest charges (MICs) on technical debt work differently. Failure to fully appreciate that difference can create problems for organizations as they try to manage their technical debt.

Credit cards also have interest charges
Credit cards. Revolving unsecured charge accounts are perhaps the most familiar form of financial debt. They do have one thing in common with technical debt: with either one, getting into debt over your head is easy.

The notion of interest is deep in our culture. We understand it well. But the way we understand it corresponds to fixed or slowly varying interest rates. This understanding biases our perception of technical debt.

The root of the problem

Because we’re so familiar with financial interest, we perceive the elements of technical debt as imposing a cost that’s a relatively stable fraction, per fiscal period, of the initial MPrin. This belief doesn’t correspond to the reality of technology-based systems, which are the targets of the technical debt metaphor.

MICs on technical debt differ from the interest on financial debt in two ways.

  • MICs depend strongly on whether and how the people of the enterprise interact with the assets bearing the technical debt.
  • The MICs on technical debt include the value of opportunities lost (opportunity costs). These losses are due to depressed productivity and reduced organizational agility.

Neither of these factors has a financial analog. In finance, interest charges depend solely on a mathematical formula involving the interest rate and principal.

Last words

In the next few posts, I’ll explore the properties of metaphorical interest charges. This investigation helps clarify how they differ from financial interest charges. It also clarifies how that difference contributes to difficulties in managing technical debt.

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